Is there a tipping point where FX spot LPs say “enough” and actually change the FX pricing models – especially where they are the only ones constantly paying the brokerage commission while spreads keep getting smaller?

During the pandemic, I wrote about discussions taking place within Bloomberg about possible fees for trading on FXGO – at the time there seemed to be a choice between a monthly fee – a la FXSpotStream – or a pure brokerage, as is the case with almost every other platform. The discussion, as my sources told me at the time, was intense, complicated and difficult to decide one way or the other – which is precisely why it apparently took three or four years for a decision to be made.

I say “apparently” because even though it’s all the rage and several people have tried to penetrate my e-wall while I was in Fiji, Bloomberg declined to comment or share details when asked. Regardless, LPs, who are predictably making angry noises, are telling me the brokerage is coming.

Angry shouting is one thing, taking actual action is another. LPs believe that by leasing a multitude of terminals they are already paying a brokerage commission and these are not cheap, although it is notable that FX departments in particular tried to reduce the number of their terminals several years ago to save costs. For its part, Bloomberg was well aware that this would have been the reaction to such a decision and must be confident that it will not hurt its business. So will it?

First of all, it seems fair to say that there is a precedent as a model. Reuters charged desks fees for its screens and also charged brokerage fees for matching and later for FXall. Within that firm, they were and are separate entities and charge accordingly. Likewise, Bloomberg has been charging brokerage fees for FX products traded on its regulated MTF for several years now. As far as I can tell, it is the overall cost that LPs are concerned about, with some reporting a tripling of their bill at Bloomberg based on their trading volumes.

Another factor that Bloomberg may have considered as a hedge against business losses is its huge advantage in FX trading – due to its fixed-rate franchise among asset managers. The company is obviously confident that this remains rock-solid, so it can risk the wrath of LPs. The fact is that FX is a side business for many asset managers, and they don’t want to go through a lot of hassle connecting to another platform when there is already one they use for fixed-rate.

This move is a timely reminder that LPs still grumble about their brokerage and feel that some platforms are ripping them off to the max. The problem has not gone away, and for many, margins are squeezed so much that even the introduction of an additional fee by a platform – no matter how large – will have a domino effect and further erode economics. This can be managed when markets are busy, volume is high and profits are correspondingly higher, but when volatility subsides, more and more LPs get into the territory where they start to think about the value of running the business.

This is something that worries the buy side, and in some circles it has been for several years, but it hasn’t gotten to the point where the buy side is actually trying to do something about it – mainly because the sell side is encouraging action but not acting forcefully enough for fear of losing valuable market share. This is where the “volume is everything” business model has caught LPs – they are now at the mercy of platforms who can charge pretty much whatever they want within reason.

I would like to make it clear at this point that platforms should charge brokerage fees – they invest a lot in building and maintaining the technology and, in some cases, in complying with their regulatory requirements – but there are increasing questions about WHO They should charge fees. Especially given that some consumers shop in the mid-range most of the time and often see the choice prices, should they contribute something?

LPs can of course “steer” clients to specific venues, and some on the buy-side have told me they are concerned that key counterparties will pay worse prices on FXGO because they include the brokerage commission. But will they really notice? Probably not, but there is a risk that Bloomberg will charge clients connected to multiple venues. If an LP can demonstrate that it offers slightly better spreads on another venue – and the post-trade workflow remains the same – some buyers might start to listen to the LPs and give preference to that other venue.

I would caution those buy-side firms that like to squeeze LPs for every fraction of a pip: if they succeed, the result will be a trade. I look forward to their attempts to maintain execution quality while selling $100 million, let alone a billion, in such an environment.

One interesting area will be what happens with the algorithms offered on Bloomberg. Obviously, banks get a fee for using their algorithm. Is that fee eaten up by a broker? If so, then the playing field is level with the other platforms that also support algorithms but have always charged fees.

Another potential risk is that LPs are using their much improved data and analytics to figure out whether they are still making enough money from certain clients. If this pushes some of those clients into the grey zone – and five dollars per million can sometimes do that – will they turn off the money spigot? For clients they have a strong relationship with (i.e. high share of wallet), they certainly won’t change anything, but this does risk putting a small number of clients on the buy side into a zone where they could get cut.

So Bloomberg’s move is not without risk, but as mentioned, the company was well aware of that when making the decision. The significance of the move was actually highlighted by a social media post saying that FXGO processed over a trillion dollars worth of transactions on July 31st – a day when most platforms admittedly had a record day, but in my opinion that’s a first for any trading venue. As is often the case in the platform world, there were no details behind the triumphant headline – how much was the spot, etc. and was it a single count (I’m pretty sure it was) – but it puts into perspective the potential impact on the industry as a whole of even $500 billion being traded at $3-5 per million, which wasn’t the case before.

To return to the core question of this column: When will LPs rebel? I suspect the answer will be, “Not in my time in the industry.” There simply isn’t enough impetus because there’s always someone who can pinch a few pennies here and there to maintain their competitive position.

As for whether we should be worried about this, I have to admit it’s hard to feel sorry for billion-dollar companies, but we shouldn’t forget the real reason for the existence of the foreign exchange market. When the real economy players, companies and investors, start seeing their returns being eroded by wider foreign exchange spreads (I refuse – and fail – to mention the fix here), then we may have cause for a serious debate.

We are far from that stage at the moment and I am not convinced we will ever get there, but I would caution the buy-side firms who like to squeeze LPs for every fraction of a pip: if they succeed in doing so, the result will be a trade. I look forward to their attempts to maintain execution quality while selling $100 million in such an environment, let alone a billion!

There are probably two things going in Bloomberg’s favor that will help it maintain its position, aside from the fact that LPs are biting as well as barking. First, more buy-side firms want multi-asset class capabilities, and while the experience on the terminal may not be the best, most asset classes can be traded there. Second, and more practically, Bloomberg probably has the largest buy-side audience of any platform, and that speaks volumes – in both senses of the word!

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